Thursday, December 3, 2015

Port Concession Models

I had blogged earlier about the new model for production sharing contract (PSC) in petroleum and natural gas exploration and argued that a revenue-sharing model would be easier to administer and, therefore, more acceptable for a risk-averse bureaucracy. In stark contrast, similar revenue sharing arrangements that are being entered into by states in long-term concessions of non-major ports may not only be difficult to administer but also prone to corruption. In the case of ports, where tariff setting is the prerogative of the concessionaire, the two conventional licence fee bid parameters are waterfront royalty on the cargo or revenue sharing. The former involves a fixed waterfront levy per tonne of cargo handled, whereas the latter involves payment of the quoted revenue share. In Gujarat and Maharashtra, the license fees are on Rs / MT of cargo handled basis with predetermined escalation at regular interval. On the other hand, states like Orissa, Tamil Nadu, and Andhra Pradesh have revenue share regime. Union territory of Pondicherry also follows the revenue share regime.

The royalty model may be superior since the reliability of government's revenues is much higher and concession management easier. This is because the details of the cargo loaded and unloaded is also monitored by the customs, thereby making waterfront royalty easy to assess. In contrast, accounting records of the operator are complex and can obscure the true revenues of port operations.

Evidence from PPP concessions of non-major ports from across the country reveals that port operators indulge in transfer pricing to shrink their revenues to the benefit of port service providers who are invariably controlled or owned by the promoters. Ports outsource a variety of services - dredging, stevedoring/pilotage, loading and unloading, customs handling, and internal and external transportation. The fees and other payments made by these agencies are under-priced to minimize the operators revenues. It is no surprise that most of the current PPP non-major port operators pay very small amounts as revenue share to state governments.

On the flip side, unlike the revenue sharing model where the commercial risk is distributed between the government and operator, in the waterfront royalty model, the risk sharing with government is limited. Even though the royalty escalates in a pre-determined manner every few years, competitive pressures mean that the developer cannot easily pass on this increased cost.

Weighing the two, it would appear that the waterfront royalty model is a more effective and incentive compatible model. And it is administratively simpler to boot.